Working with International Data
on Household Wealth and Indebtedness
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0. Case Study Learning Outcomes
Having successfully studied this case, you will be able to:
Knowledge and Awareness
- Describe and explain the data production process from data search to data interpretation
- Identify distinctive challenges of working with data on household wealth and indebtedness, in an international economic analysis
- Describe methods of economic analysis which involve working with international data on household wealth and indebtedness
Skills, Qualities and Attributes
- Search, select, describe and interpret published quantitative data sets, in ways which support economic analysis
- Apply quantitative methods in an international economic context
- Apply economic concepts and methods with the support of international data
1. Introduction: Data Use
Demands for international data on quantities of household wealth are constantly made by people in organisations deciding public policy. The prominence of these data in the work of policy analysts is indicated, for example, by articles on aspects of them which often feature in regular Central Bankpublications, including those of the Bank of England in the United Kingdom (UK).
Of increasingly pressing concern to policy makers in some countries, including the UK, is the extent to which households and an entire economy become subject to `financialisation’. This ugly new word seems useful in describing increased reliancefor prosperity on the financial sector, just one part of an economy, and on decisions taken in respect of it.
The international connectedness of economies, and of decisions in the financial sector, implies that making sound publicpolicy decisions requires the use of international data on household wealth and indebtedness.
Published secondary data on these quantities are typically presented according to established accounting principles and conventions. Concepts such as budgets have an extensive pedigree in the academic literature of economics. They were used, for example, in the pioneering work of JM Keynes and others on the macroeconomy during the 20th century.
In more recent years, pressing demands for insightful and usable analysis of issues specifically in the economics of finance has stimulated greaterand more varied use of those concepts.
Private sector demands for data on quantities of household wealth are also extensive. Decisions about targeting consumers of particular types or in particular locations, when supplying a range of services or products, can affect prospects for the success and survival of the organisation. For example, retailers of any goods which many households feel are most easily dispensable at times when their wealth fails to increase, are among those most likely to experience or anticipate a loss of profit.
In both cases, common sense and established economic theory both suggest that outcomes of decisions taken in one place in the world can be affected considerably by levels and changes in wealth, there and elsewhere.These quantities, in turn, affect levels of income and spending in many places.
Happily, demands for international data for many of these purposes can be met easily and cheaply, by secondary sources such as those published by the Organisation for Economic Cooperation and Development (OECD). They can often be used as they are, without much effort to transform them for a specific purpose by the end user.
2. Data Search and Selection
OECD Household wealth and indebtedness data are published in Economic Outlook. These and other data are readily downloadable from the OECD statistics portal[1]. We select a range of these data for a sample of 7 countries. For the purposes of this Case Study, we choose our sample of countries and time span to make particular points clearly in introducing this kind of analysis to you. These selections might differ, if the data were being used for a different purpose.
The use of accounting conventions for macroeconomic analysis requires that we do not confuse statements about debt in aggregate that is owned by private households with statements about `the national debt’, a term used to describe figures in the public sector accounts. There are economic links, of course, between the private household sector and the public sector. The links include items such as some pension rights, which appear as financial assets in household accounts but as liabilities (debt) in public sector ones.
3. Data Transformation and Interpretation
We do not propose any transformation of the OECD data we select, for the purposes of this Case Study, other than to present some of them in the form of Charts. Thus we can focus attention on interpreting what we see in those data.
Households can own (`hold’) or use various financial assets; including notes and coins, deposits with financial institutions, company shares and monies in pension funds. One way in which these types of asset differ from each other is by their degree of liquidity. Liquidity means that they vary by the ease and extent to which households can convert them into a given amount of cash. Ease of conversion affects opportunities to use finance for purposes of immediate consumption or to gain from current opportunities to invest now for a return in the future.
Each of the following 5 Charts features data which indicate notable similarities and differences between countries.
Chart 1: Stock of Financial Assets relative to Disposable Income %
Source: OECD Economic Outlook
Chart 1shows, by country, the household sector ratio of financial assets to annual disposable income (presented as a percentage figure). The Chart indicates that French and German household sectors experienced ratios of between 250 and 300 per cent through almost a decade. In contrast, the figures indicate that the Japanese household sector has typically shown a ratio equivalent to around 500 per cent.
Financial institutions enable households to acquire short term and long term credit. Short term credit is typically used by households to bridge the gap between income and expenditure. Outstanding short term liabilities are those debts which are yet to be paid back, in this caseby the household. They can include overdrafts and unpaid balances on credit cards.
Long term credit is typically used to purchase expensive items. An example familiar in some countries, such as the UK, is a mortgage:this is a financial instrument used to purchase and eventually ownhousing, usually for (household) residential purposes.
Note that the ratio used in Chart 1 is between a stock (assets) and a flow (income). The popularcomparison of a stock and a flow, in the context of household wealth and indebtedness, will be repeated in the other Charts that follow. These ratios indicate the capacity of the household sector to generate income for acquiring financial wealth or to pay off accumulated debt.
Before we leave Chart 1, you are not alone if you were tempted to seek in it consistent patterns among the lines for the 7 countries. You might also have tried to explain what causes any such patterns you think you see. This might be no more than harmless but time-consuming fun, unless the explanation is substantiated by logical and plausiblereasoning, then confirmed by further supporting evidence. That is when light entertainment can become a more rigorous challenge. In some cases, the true reasons for where the lines lie might owe nothing to any consistent economic cause.
Chart 2 shows, by country, the stock of outstanding financial liabilities held by the household sector, relative to that sector’s annual disposable income.It indicates that the stock of debt held inthe Italian household sector, despite increasing over the sampleperiod, remained below all other countries to a varying extent. For example, in 2009, the figure for Italian household debt was under 90 per cent of annual disposable income, to be compared with UKhousehold debt of about 170 per cent.
Chart 2: Stock of Financial Liabilities relative to Disposable Income, %
Source: OECD Economic Outlook
Chart 2 also shows differences between countries in the ratio of debt to disposable income, as these ratioschange during the period of the data. In passing, note the complexity of the comparison now being made by using a relatively simple run of data. It involves levels, ratios, differences and changes.
The figures indicate that the ratio has typically risen in some countries including Canada, France and the UK; but has usually fallen in others, such as Japan and Germany.
Chart 3 shows the ratio of net financial wealth to annual disposable income, for our sample of countries.Net financial wealth is the‘balance’ between financial assets and financial liabilities.
Chart 3: Net Financial Assets to Disposable Income, %
Source: OECD Economic Outlook
According to these figures, Japan has: experienced the highest ratio of financial assets to income; experienced the highest ratio of net financial wealth to income and, during the period, had household net financial wealth of between 3½ and 4 times annual disposable income (in this last case, as compared with less than twice the size in both France and Germany).
The physical wealth of the household sector largely comprises residential housing. It does also include some other fixed assets and valuables, such as the machinery and vehicles used by those in self-employment.
Before we leave Chart 3, note that we have a shorter data series for Germany than for the other countries in our sample. The same is true for the following two Charts. We would usually choose an equal span of data for all cases in a sample, if the cost of generating it is not prohibitive, to confirm any economically meaningful patterns in them.
Chart 4 shows, for each country in our sample, the household sectorratio between the stock of physical wealth and annual disposable income.
Chart 4: Stock of Physical Wealth to Disposable Income, %
Source: OECD Economic Outlook
The figures indicate that theUS household sector has experienced consistently the lowest physical wealth to disposable income ratio of any country in our sample. In 2009, that ratio was 2.1. They also indicate that UK, France and Germany have, at some point during our sample period, experienced the highest ratio of physical wealth to income in the sample. The ratio for all three of those countrieswas between 5 and 6 in 2009.
Chart 5 shows the household sector ratio between net worth and disposable income, in each of our sample of 7 countries. Net worth is the sum of net financial wealth and physical wealth.
Chart 5: Net Worth to Disposable Income, %
Source: OECD Economic Outlook
The UK and Italy household sectors have typically experienced the highest levels of net worth,among the 7 countries, relative to their annual disposable income.In 2009, the UK ratio was 8 while the ratio in Italy was 8¾.
The relatively high UK figures come as little surprise to anyone who recognises the high proportion of households there who live in owner-occupied housing. The indication that the ratio in Italyhas been even higher in recent years may be more surprising, at least to some of us in the UK. This finding is but one example of quantitative indicators that prompt a reconsideration of previously-held assumptions.
In our sample, the Canadian household sectorhas typically seen the lowestand least variable ratio,at between 5 and 5½. In 2008 and 2009, the period following deep financial crisis, however, the US ratio was lowest,falling to between 4¾ and 5.
4. Review Questions
1. In the context of published secondary data on household wealth, what are the main stages in the data production process undertaken in this Case Study?
2.
(a) What do you understand by the following terms in relation to the household sector:
(i) financial assets;
(ii) financial liabilities;
(iii) net financial wealth;
(iv)non-financial assets;
(v) net worth
(b) How is it conceivable that a household might have positive net worth, despite having financial assets in excess of financial liabilities?
3.
(a) Describe any common national long term and short term patterns you observe in the household wealth and indebtedness variables presented in this Case Study.
(b) Describe any nationally distinctive patterns you see in those data.
4.
(a) Explain what it means to compare a stock of household assets and debt with a flow of GDP.
(b) What purposes are served by presenting household wealth and indebtedness variables, for various countries, relative to nominal GDP?
(c) Suppose we used quarterly, instead of annual, data in making our comparisons between countries regarding household wealth and indebtedness, relative to GDP; what would we then need to amend or consider, when comparing these magnitudes?
5. This is a question for reflection and possible further study.
Identify those factors you think could affect, from one period to another, the value of household sector assets and liabilities in a country.
Can you link cause and effect to explain, wholly or partly, any of the patterns you have described in your answer to Question 2 above?
5. Summative Assessment Task
Locate household debt and indebtedness data within the OECD’s Economic Outlook database. Across the sample of countries featured, identify the quantity of equities (company shares), relative to the total of financial assets.
Then, for those countries about which the relevant information is presented, conduct a similar comparison betweenthe quantity of mortgages and total financial liabilities.
6. Data Appendix
OECD statistics portal
This Case Study was designed and authored by: Dean GARRATT and Stephen HEASELL, of NottinghamBusinessSchool, NottinghamTrentUniversity with acknowledgment of funding from The Economics Network, the Subject Centre for Economics of the UK Higher Education Academy.
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[1] This can be found at